Details of Fiscal Cliff Agreement Approved by Senate

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The Senate early Tuesday approved, 89-8, the fiscal cliff agreement plan and it now moves to the House, which will debate and vote on the measure Tuesday. The Joint Committee on Taxation estimated it would reduce federal revenue by $3.93 trillion over the next decade compared to current law.

The details of the fiscal cliff agreement on mostly tax-related issues contain the following:

Income taxes: Permanently extend all the 2001 and 2003 tax rate for individuals with annual incomes below $400,000 and couples with incomes below $450,000; rates for those with incomes above those thresholds would rise to 39.6 percent from 35 percent.

Payroll tax:The plan would end the two-percentage-point payroll-tax cut that was part of a deal President Barack Obama struck with Republicans late in 2010. It lowered to 4.2 percent from 6.2 percent the employee portion of the Social Security tax, allowing workers to keep more take-home pay. For an individual earning the maximum 2013 cap of $113,700 or more, the increase would be nearly $200 per month. Overall, the expiration of this stimulus would cost working Americans $125 billion a year, according to J.P. Morgan Chase.

Alternative minimum tax (AMT): Permanently patch the alternative minimum tax and prevent the parallel tax system from creeping further into the middle class and eliminate the near annual debate on indexing the income exemption levels.

Dividends and capital gains: Permanently extend the 15 percent top tax rate on dividends and capital gains for individuals with annual incomes below $400,000 and couples with incomes below $450,000; increase the top tax rate on dividends and capital gains to 20 percent for those with incomes above those thresholds. The highest earners will actually see that rate rise to 23.8 percent because of an additional 3.8 percent investment tax included in the 2010 health care overhaul.

PEP and Pease deduction caps: Permanently extend a phase-out of the personal exemption and limit the availability of itemized deductions for individuals with annual incomes above $250,000 and couples with incomes above $300,000. These are commonly known as PEP, for personal exemption phase-out, and Pease for the late former Rep. Don J. Pease, an Ohio Democrat who helped write the itemized deductions limit. Under former President George W. Bush, these deduction caps were suspended.

Estate tax: The estate tax will have a $5 million individual exemption (double for spouse), with additional inheritance taxed at 40 percent. The exemption will be indexed to rise with inflation.

Unemployment benefits: Additional benefits for the long-term unemployed are extended through the end of 2013. Those benefits expired on Friday.

Business tax credits: Retroactively renew a package of one- or two-year reauthorizations of tax "extenders," which range from a credit for business research and development expenses to a state and local sales tax deduction that the Senate Finance Committee adopted in August (S 3521) with bipartisan support. The agreement reportedly includes a two-year extension of the lapsed biodiesel tax incentive program -- retroactive to 2012, and then 2013.

Stimulus tax credits: A five-year extension of tax credits largely used by lower- and middle-class workers that were expanded as part of the stimulus, including the Child Tax Credit, Earned Income Tax Credit and the American Opportunity Tax Credit that provides up to $10,000 for four years of college.

Bonus depreciation: Extends for one year the 50 percent bonus depreciation allowing businesses to write off the entire cost of major purchases in the year they are made rather than depreciate those expenses over many years.

2008 Farm Bill extension. The agreement would include a one-year (through Sept. 2013) extension of the 2008 Farm Bill -- one major exception was the SURE program was not reauthorized at all. It would include direct payments for 2013 crops. It would not include language for a controversial new dairy gross margin/supply management program but instead extends the Milk Income Loss Contract (MILC) program effective 9/30/2012 to 9/30/2012. MILC was restored to its pre-9/1/2012 parameters, costing $110 million. This was offset by a $110 million reduction in the Nutrition Education and Obesity Prevention Grant Program.Regarding disaster provisions, the bill makes funding discretionary – an authorization for appropriations, but no mandatory funding. The bill's language authorizes, but does not actually fund, the following: $80 million for livestock indemnity payments; $400 million for the livestock forage disaster program; $50 million for emergency assistance for livestock, honey bees, and farm-raised fish; $20 million for trees assistance. For the 37 farm programs that lost their base, the package authorizes but does not fund those programs. The same is true for energy-related programs via the 2008 Farm Bill. "This is Mitch McConnell's farm bill" said Senate Ag Chairwoman Debbie Stabenow, who said she would vote for the overall agreement but is "on record that I am not happy with what was done to agriculture."

Budget Sequester: Negotiators have agreed to postpone the automatic spending cuts known as the sequester for two months. The $24-billion cost of delaying the sequester would be offset by other cuts so as not to add to the deficit. The deal pays for delaying the sequester with a mix of new taxes and spending cuts, according to a person familiar with the matter. Reportedly, $12 billion of that would come from a shift in the rules affecting workplace-based 401(k) plans. The remaining $12 billion was paid for with spending cuts.

Congressional pay: The agreement would prevent a hike in congressional pay that was authorized by an executive order from President Obama raising federal worker pay.

Here is the basic table of contents of the fiscal cliff legislation

TITLE I—GENERAL EXTENSIONS

Subtitle A—Tax Relief

Sec. 101. Permanent extension and modification of 2001 tax relief.

Sec. 102. Permanent extension and modification of 2003 tax relief.

Sec. 103. Extension of 2009 tax relief.

Sec. 104. Permanent alternative minimum tax relief.

TITLE II—INDIVIDUAL TAX EXTENDERS

Sec. 201. Extension of deduction for certain expenses of elementary and secondary school teachers.

Sec. 202. Extension of exclusion from gross income of discharge of qualified principal residence indebtedness.

Sec. 203. Extension of parity for exclusion from income for employer-provided mass transit and parking benefits.